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Mumbai: Tata Motors Ltd’s net profit dropped 2% in the quarter ended December as the company felt the impact of a poorer sales mix at its UK subsidiary Jaguar Land Rover Automotive Plc. and its domestic operations posted a loss.

Net profit fell to 3,507.54 crore in the three months ended 31 December from 3,580.72 crore in the year-ago quarter. Net sales during the quarter rose 4.2% to 71,686.12 crore from 69,121.61 crore.

A Bloomberg poll of 27 analysts estimated net profit at 2,992 crore on net sales of 72,666.8 crore.

Net sales at JLR slipped by 1.67% to £5.78 billion; net profit dipped 25.8% to £440 million, Tata Motors said.

Led by strong demand in markets such as the US and UK and new models such as the Discovery Sport and Jaguar XE, JLR’s sales volumes rose 23% to 137,653 in the quarter.

Sales in China, one of its most important markets both in terms of profitability and sales volume, remained under pressure as the world’s second biggest economy slows.

“The overall volume in China is coming back. But we remain cautiously optimistic," said Ralph Speth, chief executive at Jaguar Land Rover.

Speth expects China’s economy to advance 6.7% to 7% in the coming months. “Considering we are a new entrant, there is room for improvement, “ he said.

JLR’s operating margin, a critical measure of profitability, shrank to 14.4% from 18.6% a year ago. C Ramakrishnan, chief financial officer, Tata Motors, attributed it to a poor product mix—a higher contribution of cheaper models in the overall sales and a lower contribution by high margin markets like China.

Ramakrishnan guided for negative cash flow in the near and medium term, given higher investment. However, he added that a strong balance sheet, including total cash and short-term investments of £3.4 billion and undrawn long-term credit lines of £1.9 billion as of 31 December, as well as proven access to capital markets and bank funding would support company’s investment plans.

For the full year that ends in March, Tata Motors is expected to incur a capital expenditure of £3.3 billion on JLR, lower than the £3.7 billion the company had guided for at the beginning of the fiscal year.

Nitesh Sharma, an analyst at Phillip Capital India Pvt. Ltd, said he expects JLR’s “margins to slowly inch to 15.3% in fiscal 2016-17".

To be sure, a raft of new model launches and a strong pipeline, he added, will spur sales by volume in developed markets and also lead to a gradual improvement in China.

Not everyone is as optimistic. “With the Chinese economy yet to bottom out, the new model launch excitement may fizzle out," cautioned Mahantesh Sabarad, deputy vice-president (research—equities) at SBICAP Securities Ltd.

Sabarad attributed the margin improvement over the previous quarter to the unwinding of currency headwinds and stronger volume growth in markets excluding China.

The contribution from the China region excluding the joint venture with Chery Automobile Co. ( the entity is engaged in local production of a few models), dropped to 11% during the quarter from 27% a year ago.

This was in a quarter when the contribution from markets such as UK, Europe, and North America rose at a brisk pace. While North America’s contribution went up to 22.1% from 17%, the UK’s rose 18.9% from 14.3%. The contribution of other overseas markets, including the Asia Pacific, went up to 20.5% from 19.9% a year ago. Europe’s contribution increased to 27% from 220.7%.

Tata Motors’ loss from its domestic operations narrowed to 200.86 crore in the December quarter from 2,122.72 crore a year ago.

Besides the cost curtailment drive, the improvement was led by a recovery in volumes of heavy duty trucks and buses.

Ravi Pisharody, executive director, commercial vehicle business, said the strong demand was being driven by sustained replacement and initial fleet expansion demand.

“The fleet operators have started getting new orders from steel and cement companies," said Pisharody.

The company sold a total of 90,631 units of trucks, buses, small and light commercial vehicles, up from 90,306 units a year ago.

Passenger vehicle sales however, continued to sputter. Sales declined 12% to 32,664 units.

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